Slow­ing econ­omy needs boost

Business Standard - - FRONT PAGE - T N NINAN

So far, the Modi gov­ern­ment has been re­peat­ing the Va­j­payee mis­take. Course cor­rec­tion to­day would be good pol­i­tics and also good eco­nomics, writes T N NINAN

The last cou­ple of weeks have made three things clear. First, the econ­omy is slow­ing. Fol­low­ing the re­lease of the lower-than-ex­pected July-Septem­ber growth num­ber for gross do­mes­tic prod­uct (GDP), most an­a­lysts have low­ered their full-year growth fore­casts. Some pro­ject sec­ond­half growth at un­der 7 per cent. The en­cour­ag­ing sign is a pick-up in in­vest­ment, de­pressed so far, but that is over-shad­owed by flag­ging con­sumer spend­ing. The Re­serve Bank of In­dia recog­nises this, but con­tin­ues to pro­ject full-year growth at 7.4 per cent. Even that im­plies a sec­ond-half growth rate of only 7.2 per cent — no bet­ter than the un­sat­is­fac­tory trend rate from 2014.

Sec­ond, the in­fla­tion rate has dipped more sharply than ex­pected. The RBI tar­gets 4 per cent in­fla­tion. The cur­rent rate has been be­low that for three months, and just 3.3 per cent for the lat­est month (Oc­to­ber). The agri­cul­tural price in­fla­tion rate is lower still. The quar­terly GDP num­bers record a sharp de­te­ri­o­ra­tion in the terms of trade for agri­cul­ture. This ex­plains why farm­ers are in such dis­tress in many states, even as de­pressed ru­ral wages have con­trib­uted to poor ru­ral de­mand.

And third, the full year’s fis­cal deficit tar­get was crossed by Oc­to­ber-end. The gov­ern­ment in­sists that it will stay within the full-year tar­get of 3.3 per cent of GDP (down from 3.5 per cent in the last two years), but there is the grow­ing pos­si­bil­ity that it will be able to do so only by with­hold­ing pay­ments that are due on var­i­ous counts. In other words, it will be a fudge.

The first two in­di­ca­tors (lower eco­nomic growth and be­low-tar­get in­fla­tion) point to the need for an eco­nomic stim­u­lus, es­pe­cially when de­mand growth is slow­ing and there is spare ca­pac­ity in the sys­tem. Yet the pol­icy re­sponse has been any­thing but. The gov­ern­ment con­tin­ues to in­sist on stick­ing to fis­cal con­trac­tion. The RBI on its part ar­gues that it needs more time to un­der­stand price trends, and there­fore has not low­ered its pol­icy rate of 6.5 per cent. This, de­spite a more than 3 per­cent­age point gap be­tween that and the cur­rent in­fla­tion rate. Both the gov­ern­ment and the RBI should re-ex­am­ine their po­si­tions.

Loan rates in the mar­ket are sim­ply too high. HDFC’s home loan rates range from 8.8 per cent to 9.5 per cent, at a time when house prices are fall­ing. Nat­u­rally, hous­ing de­mand is low. Most banks have a lend­ing rate of over 9 per cent for their best cus­tomers. Small and medium en­ter­prises bor­row at much higher rates of in­ter­est. The ef­fec­tive bor­row­ing rate for per­haps the ma­jor­ity of com­pa­nies is more than their re­turn on cap­i­tal em­ployed. That trans­lates into “un­af­ford­able”. In­ter­est rates need to drop if there is to be broad-based eco­nomic re­vival.

On its part, the fis­cal stance should be less rigid. The great dan­ger in over­spend­ing by the gov­ern­ment is that it lets loose in­fla­tion, which be­comes dif­fi­cult to tame. That is not a se­ri­ous dan­ger to­day, when the in­fla­tion rate is be­low tar­get and the dan­ger of run­away oil prices has passed. There is there­fore a le­git­i­mate case for ar­gu­ing that the gov­ern­ment should al­low the deficit level to inch up to a more re­al­is­tic 3.5 per cent of GDP, the same level as in the last two years. That will be a neu­tral, not ex­pan­sion­ary, stance, eas­ily jus­ti­fied in the cur­rent sit­u­a­tion, and re­al­is­tic since the deficit has al­ready crossed the full year’s 3.3 per cent tar­get in seven months.

Fi­nally, there has to be a pol­icy pack­age to shore up agri­cul­tural prices, es­pe­cially for crops with greater price volatil­ity. The tar­get to dou­ble agri­cul­tural ex­ports is a start, but more needs to be done — and quickly. It is only when farm­ers get a bet­ter price that agri­cul­tural wages go up, re­duc­ing ru­ral poverty and boost­ing ru­ral de­mand. Po­lit­i­cally, the Va­j­payee gov­ern­ment sup­pressed food prices and paid the price. The first Man­mo­han Singh gov­ern­ment cor­rected that, de­spite the cost of higher in­fla­tion, and won-re-elec­tion. So far, the Modi gov­ern­ment has been re­peat­ing the Va­j­payee mis­take. Course cor­rec­tion to­day would be good pol­i­tics and also good eco­nomics.

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